This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Fed Misses Real Economy Again

Eighteen months ago, I accused the Fed of manipulating inflation data as well as constructing a deflation hoax. With hindsight, it appears that both accusations were correct. I also anticipated a rocky outcome when the Fed normalized unsustainably low interest rates. The consequence of that maneuver remains to be seen, but the outlook depends on the Fed's next move.

I can only fathom a guess as to why Fed officials manufactured that scare: In order to keep the economy cooking through his scheduled retirement, the Fed chairman required a not insignificant dose of artificial stimulus. Well aware of the wealth effect, especially from real estate appreciation, Greenspan initiated a bull market in property with artificially low interest rates. The deflation scare was just a ruse to camouflage his true stimulative intentions.

However, my column highlighted the obvious inflation risk last spring. Commodity prices were starting to advance. Service prices such as education, insurance, entertainment and health care premiums were rising rapidly. Real estate prices were soaring. The only real deflation out there was from Wal-Mart-purchased, Chinese-manufactured widgets. The only problem is this is a service economy and those expenditures were immune to Chinese competition -- and retail widgets are a small part of the economy anyway.

We all know what has happened to the headline CPI since, even with the hedonic adjustments.

Just as I disagreed with the Fed party line then, I dispute the inflation story today. It's funny how I disagree so often with the Fed's positions. It bought the New Economy silliness, I didn't. I foresaw rapidly building inflation pressures, they deflation risks. And now, as Fed governors incessantly highlight the perils of escalating prices, I perceive inflation risks as mitigating. The risk to the economy today is not runaway prices, but rather Fed Reserve vices. That's correct. The danger to this economy right now is the Fed's annoying, undesirable tendencies to push rate hikes much too far.

But wait a minute. With spiking commodity prices, low unemployment and rising capacity utilization rates, how can I be so sanguine regarding inflation? Don't I see the reported CPI and PPI data? Surely I of all people cannot buy that "core inflation" nonsense.

I do see the headline numbers. And we most certainly did experience a meaningful bout of inflation. However, the BLS mitigated its true scope with hedonic adjustments, unreal CPI component weightings, and nonsensical substitutions (the largest being owner's equivalent rent). In a perverse way, the "management" of the CPI kept the true pricing pressures out of inflation expectations and unit labor costs. Well, that and the outsourcing risk to the American work force.

1 of 2

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 17,079.57 -42.44 -0.25%
S&P 500 1,996.74 -3.38 -0.17%
NASDAQ 4,557.6950 -11.9260 -0.26%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs